Treasury, FHFA Outline Fannie, Freddie Rescue

The U.S. Treasury and Federal Housing Finance Agency announced Sunday a plan to temporarily take control of faltering mortgage giants Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), an intervention that could result in the largest federal bailout in U.S. history.

Treasury Secretary Henry Paulson and FHFA Director James Lockhart, in a press conference in Washington, outlined the federal government's plan to fund and control the public-private firms under a conservatorship agreement.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," said Paulson, who further noted that "conservatorship was the only form in which I would commit taxpayer money to the GSEs."

Business at Fannie and Freddie will open as usual Monday, said Lockhart, "only with stronger backing for the holders of MBS, senior debt and subordinated debt." The firms will be allowed to modestly increase their mortgage-backed securities portfolios through the end of 2009 in an effort to help stabilize the secondary mortgage market and lower the cost of funding. ...